2016-12-02T19:17:49+00:00 July 19th, 2016|Uncategorized|

How Peer to Peer Loans Work

CreditSense offers advice to help people with credit optimization and to build the perfect credit score. These days many people are turning to peer to peer loans online to help consolidate debt and seek loans to start businesses. These days interest rates on credit cards are high and many people are using peer to peer loans to help pay off debt with lower interest rates provided by peer to peer loans. Even though many people have good credit scores and substantial incomes, many lenders these days are not offering loans to people who are pursuing the dream of starting their own business. Prosper and Lending Club are two peer to peer options people are turning to in order to finance their business dreams and help consolidate debt. There are many solutions to achieve debt freedom, raise credit scores, and borrow money to pursue career goals. Peer-to-peer loans are a great option for people, and here is how you can seek help from these lending resources.

How it works
To apply, you submit a wealth of information online, such as the amount you’re seeking, its intended purpose, the proposed term and so on. The companies then run background checks, including a close examination of credit scores, available credit, and recent credit card applications, and they plug those factors into mathematical models that predict the likelihood that you will repay the money.

If you pass muster, the companies assign a grade and an interest rate to the proposed loan. If your credit is excellent, you’ll likely have a high grade and a low interest rate. At Lending Club, for instance, top-ranked borrowers were paying interest rates of 6.78 percent at the end of May. In contrast, the highest rates—designed for approved borrowers with the worst credit—were nearly 28 percent.

After the companies approve a loan, it becomes available for funding from individuals, who can review much of the same material the companies used to approve the loan. Investors typically fund portions of multiple loans to spread their risk. Some seek riskier loans because they pay higher interest rates, while others prefer loans with high grades because they are more likely to be repaid.

The companies make money by collecting fees from both borrowers and lenders. The borrower pays an origination fee of between 2 percent and 5 percent when the loan is made, and the investor pays an annual 1 percent fee.

“Be warned: Failing to repay a loan has consequences just as serious as not paying other kinds of debts,” says Monica Steinisch, who wrote a report on the P2P industry for the consumer advocacy group Consumer Action.

“This has an informal feeling about it, but you are still entering into a legally binding contract,” she says. “If you miss payments, you are going to get calls and letters from a collector. You’ll be reported to credit bureaus. It will affect your credit score. You could be sued. Your wages could be garnished.”

Borrowing Tips
Experts say there are plenty of ways that borrowers can make their applications more attractive to the companies and to the people who fund the loans. The more creditworthy you appear, the lower your interest rate, and the more likely investors will advance you the money you seek.

Here are some tips to improve your chances of getting a P2P loan at the lowest cost to you:

• Provide a detailed description of why you need the money. Although many borrowers bypass the chance to explain why they’re seeking a loan, investors like details. Even mentioning a steady income and successful repayment of prior loans can help. Be aware that some investors shy away from funding loans they consider frivolous, such as money for taking vacations.

• Optimize your credit. There are no quick fixes, but there are steps you can take to boost your credit score, such as cleaning up your credit identity as reported by the credit bureaus, auditing your credit report for inaccurate and erroneous accounts, paying bills in such a way that you garner additional credit score points, optimizing your credit card and revolving account balances, using credit inquiries intelligently, and not applying for new credit cards before seeking a P2P loan. If your credit is poor, you might not be approved, and if you are, you’ll face a higher interest rate than those with better credit.

• Don’t seek more money than you need. Bigger loans mean you’ll pay higher fees and probably higher interest rates. The maximum you can borrow is $35,000.

• Opt for a shorter term, if you can afford it. Although the monthly payments are higher for shorter-term loans, they also tend to carry lower interest rates. The faster you can repay the loan, the better. There is no penalty for repaying early.

• Avoid late payments. Just like credit card companies, peer to peer lenders charge hefty fees for missed payments. The lenders are just as serious as a traditional bank about getting the money they are owed.


Lending Club and Prosper are not the only sites to link people who want money with people who have money. Outside of consumer loans, here are other sites that are harnessing technology and upending traditional ways to get cash:

  • Kickstarter: Matches people who need money to shoot a film, write a book or undertake another creative project with financial supporters, who receive a copy or sample of the work. (Similar sites include Indiegogo and RocketHub.)
  • Kabbage:Provides instant fund advances to online businesses operating on eBay and Amazon.
  • GreenNote: Enables students to create profile and solicit donations online for college tuition.
  • DonorsChoose: Links donors with teachers, who create wish lists of materials for their classrooms.
  • Mosaic (solar energy) and Poliwogg(health care): Connect investors with companies looking for capital in different industries.